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Tuesday, 24 April 2012

The Enemies of Growth

The Economist article on The Question of Extractive Elites certainly resonated with me last week, as it did with those involved in the subsequent discussion on Buttonwood's notebook. It's another way of looking at the difference between 'facilitators' and 'institutions'.

In “Why Nations Fail: The Origins of Power, Prosperity and Poverty”, Daron Acemoglu and James Robinson, suggest "extractive economies" experience limited growth because their institutions “are structured to extract resources from the many by the few and... fail to protect property rights or provide incentives for economic activity.”
"Because elites dominating extractive institutions fear creative destruction, they will resist it, and any growth that germinates under extractive institutions will be ulimtately short-lived."
Acemoglu and Robinson place certain 'third world' economies into the "extractive" category, but place the developed world into an "inclusive" category on the basis that their institutions tend not to be extractive. But as Buttonwood notes, there are elements of developed economies that fit the description of extractive economies, citing banks and the public sector as the most likely candidates - although I would add the institutions that comprise the pensions and benefits industry as another example. And we should define "public sector" quite broadly to include political parties, unions, quangos and so on.

These extractive institutions tend to be linked, since the public sector is not only capable of extracting resources in a way that starves business or crowding out private investment, but it is also responsible for regulating the private institutions that are themselves extractive.

As previously discussed, high levels of public spending and national wage bargains are partly to blame for throttling the UK economy and preventing the development of manufacturing, particularly in regions which struggle to capitalise on the lower cost of living to keep wage costs down. The tax and regulatory framework favours banks and regulated investment institutions over new entrants. 

The current UK government is trying to spend less, but it's refusal to regulate means extractive frameworks are not being overhauled. Of course there is a danger that the new entrants seeking a level playing field may be tomorrow's "extractive institutions". But that would at least imply significant creative destruction in the meantime. Ideally the rise of "extractive institutions" would be kept in check by more dynamic regulatory intervention, but future overhauls may be required.  

That is the politicians' job. But they, too, have a tendency to be the enemies of growth.

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